The third measure that is
being experimented with is a sharp hike, pre-budget possibly, in excise
duties. To this end the government has by ordinance armed itself with the
right to impose excise duties in excess of 100 per cent. While justified
on the basis of the likelihood of (or need for?) war, given the dispute
with Pakistan over the terrorist issue, the real reason for this move
appears to be the desperation to government’s own self-imposed but
unsuccessful war on the fiscal deficit. Speculation has it (The Hindu,
January 10, 2002) that the hike in excise duties would be focussed on
petroleum products, with the implicit proviso that the burden of the
enhanced duty would not be passed on to the consumers just now, so that
the initiative does not meet with opposition. This would result in losses
for the petroleum companies and an increase in the oil pool deficit
currently placed at Rs. 8000 crore. But the oil companies too would not
have to finally pay, since with the dismantling of the administered price
mechanism in April, the government would have to issue bonds to the oil
companies to finance their deficit.
The absurdity of any such
move, if actually undertaken, should be obvious. To start with, since the
bonds to be issued in April would have to be counted as part of the
government’s borrowing requirement, the measure only amounts to
transferring a part of this year’s deficit into next year’s budget.
Further, since the higher excise duty would remain in place till reversed,
it is likely that sometime later the companies would indeed make the
consumers pay the duty and bear the burden of the cascading effects on
prices that any increases in the prices of universal intermediates has.
This meaningless move at the expense of consumers, if resorted to, would
only be explained as an effort to garner immediately the Rs. 1500 to Rs.
2000 crore that the measure is expected to generate.
All this has become
necessary because of the peculiar kind of fiscal crisis that neoliberal
economic reforms in general and financial liberalisation in particular
have generated. Trade liberalisation, which has included steep reductions
in customs tariffs, has resulted in a fall in customs revenues accruing to
the government. Further, the success of reform being predicated on a rise
in private investment, the government has been offering a range of tax
concessions as incentives to spur such investment. While these concessions
have not been successful, they together with the loss in revenues from
customs tariffs, have resulted in a decline in the ratio of central taxes
to GDP to the tune of 1.5 to 2 percentage points. This implies that even
when the fiscal deficit to GDP ratio is at levels close to where it was in
the late 1980s, which has been true in at least a couple of years in the
1990s, the fiscal stimulus associated with that deficit has been far less.
A lower tax-GDP ratio implies that the expenditure to GDP ratio associated
with any given fiscal deficit would be lower.
If we combine this with the
tendency for the fiscal deficit-to-GDP ratio to rule lower because of the
kind of fiscal reform being adopted with the government, a basic tendency
towards slower growth should be expected. For some time this tendency was
being counteracted by special factors such as the post-reform boom in
durable consumption attributable to the pent-up demand for such goods from
the less liberal era. But once such counteracting factors lose their
strength, as has happened in recent years, a recession is inevitable. The
recession in turn reduces tax collections further, as has happened in the
first nine months of fiscal 2001-02, aggravating the fiscal crisis.
But that is not all.
Financial reform has forced the government to substitute less expensive
borrowing with credit obtained at much higher interest rates. Not only do
real interest rates tend to rule higher under reform to offer better
returns to foreign financial investors but the government is forced to
abjure borrowing from the central bank at much lower interest rates. Thus
even the less efficacious fiscal deficit is partly accounted for by
outlays on burgeoning interest payments and consists of a significant
deficit on the revenue account of the government. This weakens the fiscal
stimulus associated with a given deficit even further.
In the
event, neither is the deficit low enough to satisfy the government, the
international financial institutions and financial investors, nor does the
stimulus provided by any deficit correspond to the apparent size of the
deficit. The fiscal crisis in fact worsens, but the deficit it results in
does not spur growth even when food stocks are aplenty, unutilised
capacity abounds, inflation is low and foreign exchange reserves are
comfortable. Pre-budget manoeuvres of the kind described would only
contribute to the persistence of this paradoxical situation, while
imposing heavier burdens on the poor and middle classes.
